And if anyone tried to head out to the shopping malls on Friday, people were going out of their minds.

So here’s my question: what is a sale, exactly?

The Convention

This is the nebulous explanation (which feels a bit inherited – like the answer to a question that I asked as a toddler):

Shops sell us fun toys

But they usually order extra toys; so you’re not disappointed if you really want one.

Because of that, they usually have toys left over.

Which is not nice, because they must get new toys to sell; only, now the old toys are taking up space.

So they have a sale to get rid of the old toys.

And I think that’s still the way that we think of sales: the shops are cleaning out old stock, and making way for the new lines, and so on.

Here’s The Trouble With That

In our naiveté, we’re assuming that shops and chain-stores are just going to continue blindly hoping that they’ll sell most of their stuff at full price, only to declare “Oh shucks, we didn’t, let’s have a sale then” every Black Friday.

Oh – and that they’ll also just ignore the mass shopping hysteria that causes deaths and injuries.

Uh no.

If I was a shopkeeper, and I knew that people went crazy with their credit cards on Black Friday, then you’d only catch me off guard for one year. Maybe two.

Because then I’d start to do the following:

Massage prices higher in the months prior to Black Friday, in order to have larger discounts on the day, with the same margin that I always wanted.

List high prices on the product that would never be charged (ie. items that would permanently be on sale) – making sure that I would still get the price that I always wanted.

Also, what of online retailers, who use all their Big Data to predict sales trends, and use just-in-time technology for the rest?

Why are they getting involved in sales?

Some Examples

A quote from former JC Penney CEO, Mike Ullman:

“We must sell and will compete to win. That means initially marking up our goods to sufficient levels to protect our margins when the discount or sale is applied.”

In 2012, another ex-JC Penney CEO, Ron Johnson, said that less than one out of every 500 items was sold to customers at full price, and customers were receiving, on average, a 60% discount (up from 38% a decade previously).

But interestingly, the average price remained the same.

What does that tell you?

The only thing that changed was the initial price…

Even more interestingly – when Ron Johnson decided to dispense with all the sales, and just charge low prices from the outset, JC Penney did so badly that he was fired.

A Weakness for Bargains

We all like to think that we’re shrewd buyers with an eye for a bargain.

Also, to hear people in the fashion industry talk about just how much excess stock they have at the end of the season, have a listen to this “Fast Fashion” episode of The Bottom Line podcast from BBC Radio 4. Spoiler alert: it’s almost none.

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook atwww.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: 0808.

Comments

I was on the initial machine learning team at takealot. We built a lot of recommendation stuff, and the team was just about to look at pricing stuff when I moved on to greener pastures. You need to build very interesting models to a good job of gauging price sensitivity!

In terms of why Black Friday persists, even though I’ve seen both sides of the equation, I still buy more than I intend to.

I was on the initial machine learning team at takealot. We built a lot of recommendation stuff, and the team was just about to look at pricing stuff when I moved on to greener pastures. You need to build very interesting models to a good job of gauging price sensitivity!

In terms of why Black Friday persists, even though I’ve seen both sides of the equation, I still buy more than I intend to.